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Briefing highlights

  • Behind the tariff reprieve
  • Treasury yield curve inverts
  • Stocks, loonie, oil at a glance
  • German economy shrinks
  • The loonie: A ‘complicated teenager’
  • WeWork owner files for IPO
  • Required Reading

What to make of the reprieve

Analysts are speculating on the motives and calculating the potential impact of President Donald Trump’s decision to delay tariffs on certain Chinese goods.

The 10-per-cent tariffs on US$300-billion of Chinese products had been scheduled to come into effect at the beginning of September. But the administration pushed about half the levies to Dec. 15.

There now won’t be a runup in certain prices during the holiday shopping season. And we’re talking about key consumer products here, such as phones and laptop computers.

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At the same time, some may see this as something of a truce in the U.S.-China trade war amid a reprieve on the levies and plans to resume negotiations.

Mr. Trump said he did it “just in case some of the tariffs would have an impact on U.S. consumers” during the crucial holiday shopping season, which, obviously, they would have.

Regardless, markets certainly applauded his decision as investors drove stocks up sharply Tuesday.

“Notably, this was a much more consumer-heavy basket than those affected by previous rounds – the likes of Apple and Best Buy surged on the day,” said Bank of Montreal senior economist Robert Kavcic.

“But, isn’t this akin to Santa Claus stealing your bike and then giving it back to you as a holiday gift?”

Apple was indeed a winner, with “the tech giant breathing a sigh of relief over the fact that the U.S. tariffs delay specifically took cellphones off the table until December,” said IG senior market analyst Joshua Mahony.

“That shift means that the likes of Apple will be able to embark on much of the big November and December sales period unimpeded.”

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American multinationals were no doubt “furiously lobbying in the background” for exemptions to the planned levies, said Andrew Hunter, senior U.S. economist at Capital Economics.

“Apple, the key beneficiary of the delayed tariffs on cellphones, usually introduces its new iPhone models in September,” he noted.

As for the broader trade war, BMO senior economist Jennifer Lee, Mr. Kavcic’s colleague, believed there would be “a little more compromise” as “the economic pain” deepened and was felt by both countries.

“This may be it,” Ms. Lee said.

“Although no one should be breaking out the [Mumm champagne], given that it was only a delay and some goods will start seeing higher tariffs come Sept. 1, the move, or the gesture itself, is promising.”

Citigroup global economist Cesar Rojas and his colleague Catherine Mann, global chief economist, estimated that the mid-December tariffs of 10 per cent will cover about US$161-billion of Chinese products.

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Notably, about 43 per cent of those products will be consumer goods that include phones, laptop computers, video games, toys and more.

“While the delay could be seen as some ‘goodwill’ to continue with trade talks and resume Chinese purchases of agricultural goods, it also gives additional time to the U.S., given these items would have a larger impact on inflation and consumption (as this list is more consumer-goods-intensive that previous tariffs),” Mr. Rojas and Ms. Mann said in their report.

The bond market isn’t prepared to turn on its heels without an awful lot more evidence

— Kit Juckes

Here's what observers are saying:

“It seems that Mr. Trump blinked first, and the bulls are taking full advantage of the news. With worries about a recession brewing in Germany, political uncertainty in Italy and violent scenes in Hong Kong, the easing up of hostilities between the U.S. and China has been a welcome change to the doom and gloom of the past few days.” CMC Markets analyst David Madden

“The three-month delay to the imposition of tariffs on more than half of the US$300-billion of Chinese imports, originally scheduled to take effect next month, is obviously designed to avoid a politically damaging rise in consumer prices ahead of the holiday season. It should not be misinterpreted as a sign that trade tensions are easing.” Mr. Hunter of Capital Economics

“After the President’s intervention, the yuan and Asian currencies rallied along with global equities and oil, iron ore, copper and even coffee prices. Bond yields rose, but perhaps not by as much as you might have expected on a day when political concerns eased a bit but [consumer price index] and small business confidence data both came in above expectations. The bond market isn’t prepared to turn on its heels without an awful lot more evidence.” Kit Juckes, global fixed income strategist, Société Générale

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“It it has blunted some of the pessimism that had started to seep into sentiment over the course of the last few days. The big question is whether it will last and it is here that optimism is likely to give way to realism, with the extent of this current rebound likely to have limits, particularly if the situation in Hong Kong deteriorates further and prompts a response from China. Investors need to remember that while some of the more consumer-sensitive tariffs have been delayed until 15 December, and some dropped completely, the ante is still higher than it was before President Trump announced the tariffs increases, at the beginning of the month.” CMC Markets chief analyst Michael Hewson

“This U.S.-China trade dispute has been one of the greatest drivers of the global slowdown, and thus while markets talk of yields and a potential crash, it all has a grounding in this breakdown in relations. With full talks scheduled for September, this decision substantially shifts market perception over whether they will be implemented or not.… For the most part this is an exercise of kicking the can down the road, and from a market perspective that should be enough to put those U.S.-China based fears on the backburner for the time being.” IG’s Mr. Mahony

“While the tariffs delay could be read as a reduction in the pace of escalation, our base case is for the U.S.-China trade war to continue.… Provided that the U.S. economic and financial conditions continue to be favourable, the U.S. would keep an aggressive stance on trade. If it worsens into the 2020 election (e.g., a sharp correction in equity markets, larger impact from the new round of tariffs), then we could see the U.S. administration stepping back and agreeing on a ‘veneer’ of deal.” Citigroup’s Mr. Rojas and Ms. Mann

“The decision may actually prove to be a win on multiple fronts, as the tariffs would likely have lifted inflation just as the Fed was being pressured into cutting rates due to the economic risks and mild price pressures. The last thing the White House wants to do is give the central bank a reason not to cut rates at a time when the economy is at risk of slowing.” Oanda senior market analyst Craig Erlam

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Treasury yield curve inverts

From Reuters:

The U.S. Treasury bond yield curve has inverted for the first time since 2007, in a sign of investor concern that the world’s biggest economy could be heading for recession.

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The inversion – a situation where shorter-dated borrowing costs are higher than longer ones – saw U.S. 2-year note yields rise above the 10-year bond yield.

The curve inverted to as much as minus 1.7 basis points at one point.

Such an inversion, considered a classic recession signal, occurred last in June, 2007, when the U.S. subprime mortgage crisis was gathering pace . The U.S. curve has inverted before every recession in the past 50 years, offering a false signal just once in that time.

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Markets at a glance

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German economy shrinks

Europe’s economy expanded 0.2 per cent in the second quarter, but its powerhouse, Germany, is showing more signs of fatigue.

Both the euro zone and the wider European Union saw gross domestic product expand 0.2 per cent from the previous quarter, according to Eurostat, the region’s statistics agency.

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That marked a slower pace than the euro zone’s 0.4 per cent and the EU’s 0.5 per cent in the first quarter.

All eyes were on Germany, however, as its economy contracted by 0.1 per cent in the second quarter, hurt by falling exports and raising fears of a recession.

Germany’s year-over-year showing marked the slowest pace of economic growth since 2013, noted BMO’s Ms. Lee.

“And, the latest manufacturing data (industrial production down 1.5 per cent, manufacturing PMI at 43.2) suggest that the economy may actually shrink again in Q3, which means that Germany could be in a recession,” Ms. Lee said.

“I will point out that other areas are still holding up (services PMI 54.5, retail sales +3.5 per cent, jobless rate 5 per cent), but clearly not enough to offset the drag from the other components of the economy,” she added.

“In this environment, Germany’s government will feel more pressure to boost fiscal stimulus and not to stand in the way of further [European Central Bank] easing.”

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Teenage angst

Mark McCormick likens the Canadian dollar to a “complicated teenager.”

In a nutshell, there’s a lot going on there, as the global head of foreign exchange strategy at TD Securities points out.

The currency had been moving on interest rate spreads – and still does and will, of course.

But “rate spreads are no longer the only game in town,” Mr. McCormick said in a report titled “The complicated teenager.”

“CAD has a few more dimensions to deal with these days, relating its evolving drivers to that of an adolescent teenager,” he added, referring to the loonie by its symbol.

“It’s complicated, in other words.”

Indeed, add to rates economic growth, oil prices, stocks and “risk appetite” in the markets.

“Most of these factors relate to things outside the Canadian economy, so CAD gets pulled along based on any shifts in the global narrative,” Mr. McCormick said.

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WeWork owner files for IPO

From Reuters: WeWork owner The We Co. filed with regulators for an initial public offering and published detailed financial statements for the first time that showed it lost almost US$700-million in the first half of 2019 while doubling revenue.

Teachers’ looks to expand in Asia, Europe

From Reuters: Ontario Teachers’ Pension Plan, one of the world’s biggest pension funds, plans to hire “extensively” in Asia and Europe over the next two years and could shift an extra $11-billion into infrastructure and other real assets, its chief executive told Reuters.

CAE posts drop in profit

From Reuters: CAE Inc. reported an 11.4-per-cent fall in quarterly profit, as the world’s largest civil aviation training company was hit by higher expenses.

Metro profit rises

From The Canadian Press: Metro Inc. reported a profit of $222.4-million in its latest quarter, up from $167.5-million a year ago, as sales also climbed higher.

Aimia posts profit

From The Canadian Press: Aimia Inc. earned $43.5-million in its latest quarter, boosted by gains related to investments, as it worked to transform itself following the sale of its flagship Aeroplan program earlier this year.

Required Reading

Brookfield makes long-term bet

Brookfield Asset Management Inc.’s private-equity arm is making a long-term bet on Canada’s mortgage market with a $2.4-billion deal to take control of Genworth MI Canada Inc., the country’s second-largest mortgage insurer, James Bradshaw writes.

Softwood exports plunge

The value of B.C. softwood shipments into the United States has plunged 25 per cent as American duties and lower-than-expected home construction south of the border reduce demand. Brent Jang reports.

Hydro One surging

Hydro One Ltd. is on a tear and there is a good reason why: The Ontario government finally appears to have left the utility alone. David Berman looks at the stock.

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